US-based Forbes magazine noted this week that private equity firms take a keen interest in franchise businesses because of their reliable income stream from regular fee payments from franchisees.
Yet Corina Vucic, a franchise industry veteran and director of FC Business Solutions, told My Business that the interests of private equity are vastly different from the core tenet of franchising: long-term brand growth through a profitable, sustainable network.
“Franchising is very strong in our country, has had very strong growth and has been a great business format for great entrepreneurs to expand and grow geographically with their concept. Many of those franchisors, those owners who have set up the brand, over the last few years have obviously come into that age group where they’ve matured and they’re looking at their exit plans,” she said.
“What we have seen in our country is that the exit plan in many cases has been private equity. So over the last few years, lots of private equity have gone and purchased and acquired and put money into franchise groups.
“I think what we’ve seen in the last couple of years, and we will continue to see, is what makes a franchise system successful, at its heartbeat or its DNA, is completely different to the way private equity values outcomes and return on investment.”
According to Ms Vucic, private equity is purely a numbers game focused on “returns to themselves and their shareholders”. This is in marked contrast, she said, to franchising’s core focus on brand growth and the profitability of franchisees.
“When the two come together, there’s a misalignment, and it’s very, very difficult to have a private equity own and drive a franchise system without needing to worry about the numbers,” she said.
“Whereas when you’re in the franchisor game, it’s not always about the numbers: the numbers are important, the numbers drive growth, they drive success, they drive happy franchisees. But sometimes franchisors make decisions that are not sound financially because they want to do the best thing to grow their franchisees’ [businesses] and to grow their brand through their franchisees’ satisfaction.”
The industry as a whole will need to “accept that private equity isn’t the only option” when it comes to succession planning for network owners, Ms Vucic said, if brands are to continue to uphold their founding legacies and remain attractive for franchisee operators.
My Business has reached out to the Australian Private Equity and Venture Capital Association Limited (AVCAL) for its response.